I’ve been refused a loan – what should I do next?

Key takeaways

• Don’t panic or apply for more credit, instead find out why you were refused and take practical steps to correct issues and boost your credit score.

• Your credit history, income, employment and regular outgoings will all be considered when a lender makes its decision.

• An error on your credit history or any of your financial accounts could lead to a loan being refused.

Why was I refused a loan?

If you apply for a personal loan and you’re refused, it’s important to find out why this has happened. It might be because of one of the following reasons.

Is it my credit history?

If you have a limited, or no credit history at all, this can be a reason a lender has rejected you as it can’t see how you’ve managed borrowing money before. A lender may also refuse you if you don’t have a good or perfect credit score or if you have a County Court Judgment (CCJ) or bankruptcy on your file . You can check your credit score for free as it can indicate why your loan has been rejected.

Is it affordability?

When you apply for a personal loan, the lender will look at your income and your regular outgoings to give you an affordability score. It may have rejected your application because it thinks you won’t be able to comfortably afford the repayments.

Is it the type of work I do?

Lenders often make life harder for self-employed and contract workers. That’s because they usually don’t have a regular income and are seen as a higher risk than employees in full-time employment.

Do I earn enough?

Lenders will have a minimum amount you’ll need to earn before they will agree to a loan, if you don’t earn this, they will automatically reject your application.

Did I apply too many times?

If you make multiple applications for credit, these will be recorded on your credit file and lenders can see this. It makes them worried you aren’t managing your money correctly and they will be wary about lending you money.

Am I on the electoral roll?

Lenders use the electoral roll to confirm your identity and address so if you’re not registered (it’s free to do so) they may reject you.

Are my details correct?

If there’s a mistake on your application, such as a wrong spelling or an incorrect address which is not the same as the details on your credit file , this could be a reason your application is rejected.

Is it the lender?

Every lender has its own set of rules and criteria when it comes to approving credit or not. It will make the decision, not a credit reference agency, and you should ask the lender why you’ve been refused a loan.

Is it my relationship to someone else?

If you’re linked to another person who has bad credit, you have a joint credit card or current account, for example, this could have a negative impact on your credit score and be a reason for a loan rejection.

Will being refused a loan affect my credit score?

Your credit score may be temporarily impacted if you’re rejected for a personal loan. That’s because when you apply for a loan, a hard search is carried out on your credit report and this stays there for up to two years.

What isn’t recorded is that you were refused or accepted for credit, just the fact that you applied. If you were to make lots of applications in a short space of time, this will negatively impact your score as it indicates that you’re struggling financially.

What’s the difference between a soft search and a hard search?

A soft search for credit does not leave a mark on your credit score and no one else will be able to see it. This is what happens when you use a free eligibility checker tool , to see what loans you might be likely to get before you apply.

A hard search leaves a mark on your credit file and other lenders will be able to see that this has been done and that you made an application for credit. This remains on your file for up to two years.

What should I do immediately after being declined?

If you’re rejected for a personal loan, try to stay calm and don’t panic. There are practical steps you can take to find out why this has happened, and to correct any errors that have been made. They include the following:

1. Don’t apply for more credit: Try and wait at least six months until you do as every time you apply for credit a hard search is done and this affects your credit score. If you make lots of applications in a short space of time this is not a good sign to lenders and it puts you at a high risk of not being able to afford loan repayments, if you were given one.

2. Check your credit report: It’s free to check your credit report , which is a detailed history of all your borrowing and repayments. This is where you can see if anything is wrong - such as if there’s a missed payment recorded, which you know you’ve made, or an incorrect account name. If you spot an error, contact one of the main credit reference agencies and it will investigate the issue.

3. Ask the lender why you were rejected: It made the decision so you should ask the lender why your loan was rejected. There should be some potential reasons as to why your application was rejected and this can help you to understand the situation and give you advice on what to do before applying for another loan.

4. De-link yourself financially: If you have taken out credit with another person, this could be anything from a credit card or overdraft to a utility bill, you may still be linked, even if you are no longer in contact with them. To remove this account from your credit report you will need to ask for a ‘notice of disassociation’ from each of the credit reference agencies and you’ll need to give details that there is no longer a financial relationship between you and the other person.

How can I improve my chances before applying again?

There are lots of steps you can take to improve your chances of being accepted for a loan. They include:

• Use a free eligibility checker: Before making another application, use an eligibility checker to see what your chances are of being accepted. These are free and only require a soft search so no mark is left on your credit score.

• Correct mistakes: If you have spotted any errors on your credit report or your accounts, contact the credit reference agency or the provider to correct these. This can be anything from a typo in your name to an old address that hasn’t yet been updated.

• Build your credit score: Focus on boosting your credit score and building it up over time. There are lots of things you can do, including always making repayments on time, not using too much of the credit available to you and even using credit building tools. Taking out a small amount of credit, such as with a credit builder credit card, and ensuring you make the repayments can help to boost your credit score overall. However, this won’t work unless you can make the payments needed.

• Lower outstanding balances: If you have high balances on current debt, such as loans, a credit card or an overdraft, try to work on lowering these and clearing the debt altogether. Paying off more money each month, if possible, and always paying more than the minimum repayment will shorten the time you’re paying off the debt and increase your credit score.

• Register to vote: If you’ve not already registered on the electoral roll, do this as soon as possible as it’s one of the ways lenders verify your identity and address.

Should I apply for a smaller amount or shorter term?

You may be more likely to be accepted for a personal loan if you apply for a smaller amount of money. However, remember multiple applications for credit suggest you are a high-risk borrower so try and avoid doing this in the short term.

Applying for a loan with a shorter term could help you to pay less overall, as you are paying less interest. But this depends on the type of loan you’re applying for. Short-term and payday loans charge the highest rates of interest even though they have the shortest terms.

What are my options if I still can’t get a loan?

Another form of credit could be a better option for you if you’ve been refused a loan. However, this is only an option if you can afford the repayments you’ll be required to make.

H3: Could a credit union be an option?

Credit unions often accept borrowers with poor or limited credit histories. They also tend to have better deals and lower interest rates than mainstream lenders.

Is a guarantor loan right for me?

A guarantor loan , whereby someone you know - a family member or friend - agrees to guarantee your loan is an option. This can be especially helpful if you have a limited, or no, credit history. The guarantor, however, needs to be comfortable agreeing to cover the loan repayments if you can’t for any reason.

Should I consider a secured loan?

A secured loan if another option. This is a type of loan whereby you secure something, such as your home, against the loan. You may be more likely to get this type of loan but there is also the risk that your home (or another asset) is taken away if you can’t make the repayments.

What if I’m borrowing to cover bills?

If you’re borrowing to cover essential bills and struggling financially, there is help available. You can speak to your lenders to lower your bills or to set up an affordable repayment plan and there may be discounts, grants which you don’t pay back, or benefits that can help. Speak to a free and independent organisation such as StepChange , Turn2Us or National Debtline for help.

How do I avoid loan scams after being refused?

Criminals target people who are vulnerable financially and this could be you if you’ve been refused a loan. They may contact you to offer you a loan, for example, which doesn’t exist purely so they can access your personal and financial details.

Loan sharks, who are illegal in the UK, may also contact you. They offer loans with high interest rates and use intimidation to secure repayments. If you’re concerned you’ve being approached by a fraudster or a loan shark, follow these steps:

How do I check a lender is authorised?

All lenders in the UK need to be authorised by the Financial Conduct Authority (FCA). You can check the FCA register to see if a lender is on it or not. If they’re not they are committing a criminal offence.

How do I report a loan shark?

You should contact the police if you’ve been approached by a loan shark or you’ve entered into any type of agreement with them. You can also report the crime at Stop Loan Sharks , and get specific help and advice through this organisation by calling 0300 555 2222 or through WhatsApp on 07700 102773.